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LINK to Essay_Five

  1. 1. “Morgan Stanley posted a $3.59 billion loss, its first quarterly loss in 21 years, amid a $9.4 billion write-down on its mortgage assets. The losses, which CEO Mack called ‘embarrassing,’ came as the firm got a $5 billion investment from a Chinese fund in exchange for a 9.9% stake. Shares rose 4%. Chinese buyers spent $29.2 billion acquiring foreign companies so far this year, outpacing for the first time foreign buyers that have invested in China.” (Wall Street Journal, 12/07, p. A1) What type of thesis research might you conduct within your own major to examine some of the dynamics at play described in this Wall Street Journal article? From a financial prospective, it would be important to first examine the cause of Middle Eastern and Asian entities investing into American and European investment banks. The initial cause for foreign investors is due to Sub-Prime lending. Sub-Prime lending is the issuance of loans to borrowers that do not qualify for market interest rates. Borrowers may not qualify based on size of the loan, size of the down payment, credit history, income level, and current employment. Therefore, when a person who does not qualify for market interest rates wishes to take out a mortgage to purchase a home they must resort Sub-Prime lending. Lenders proceeded to accept adjustable rate mortgages with long term incentives and the belief that they could refinance at a later favorable date. Unfortunately, the housing market started to decline in 2006-2007, and it was impossible to refinance mortgages at affordable rates. Consequently, over a million properties were filled for foreclosure during 2007 which was up 75 percent from 2006 (1). Investment banks such as Morgan Stanley and UBS AG held on to portions of these investments and grouped other loans into categories and placed them on the market for third parties to invest known as securitization. Many transactions between the investment banks and third parties are backed by assets (asset backed securities). Credit rating agencies such as Moody Investor service can be attributed to the defaults of third parties
  2. 2. because credit rating agencies assigned generous ratings. “Imagine if you wanted a B- plus on your term paper and your high-school teacher sat down with you and helped you write an essay to make that grade” (2). Essentially, credit rating agencies have been found guilty of this practice. This practice is another influential factor in the Sub-Prime Lending crisis because without assigned credit ratings bonds and other trades would not occur. As a result investment banks such as Morgan Stanley and UBS have had to right down billions of dollars on their loans. Foreign countries have been investing into over seas banks such as Morgan Stanley and UBS. Singapore just recently invested over nine billion dollars into UBS. The terms imply 9% annual return on the investment for the first two years until converted into normal shares (3). This type of investment is vital to securing UBS’s Tier 1 capital. The Chinese government pumped five billion dollars into Morgan Stanley after their recent losses. Foreign investment by overseas governments is a representation of growing economies. China is the primary example. The Chinese economy is booming with extra funds to invest. The Sub-Prime lending crisis has provided a great opportunity for China to invest in prime Wall Street Investment Banks. However, have these foreign countries made the investment too early? The market continues to slide down a slippery slope as the investments have already been made. It is important to point out that the United States owns 52% of its own debt within Social Security, Medicare and other programs (4). Foreign investment to in the United States proves that the United States is still the best place in the world to invest in. People invest in other entities because they believe the entity will create a profit. The entity only pays a portion of its profit to the investor. If China is the investor and the United States is that entity that leaves us in a
  3. 3. pretty good position. Yes, Sub Prime Lending has created a crisis. Foreign investments are helping fix the problem. Only time can tell the outcome of Sub-Prime Lending. The dynamics above provide numerous thesis research topics within Finance. I believe the most interesting would be researching and studying the role that leverage and risk had in producing such large losses. For Example, I would like to conduct research on the effect that financial leverage, provided by financial institutions, has had on producing the current credit crisis. Specifically, that would include both the leveraged growth cycle of the past five years, and the de-leveraging effect currently leading to the liquidity crunch. This can be analyzed both from the financial institution's, and their customer's perspective, including what their investment objectives were, their approach to achieving these objectives, and the eventual outcome for both parties. Other possibilities include the effect market pricing (or lack thereof) had, the impact of rating agencies and insurance companies, or a comparison to previous market cycles excesses along with the related causes/corresponding products.
  4. 4. Works Cited 1. RealtyTrac Staff. " U.S. FORECLOSURE ACTIVITY INCREASES 75 PERCENT IN 2007."RealtyTrac. 1 Jan. 2008. 3 Apr. 2008 < ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847>. 2. Eisinger, Jesse. "Moody's Ratings Fiasco ." Portfolio. Sept. 2007. 3 Apr. 2008 < Moody-Ratings-Fiasco>. 3. Chen, Shu-Ching Jean. "Singapore Investment Arm To Sink Billions Into UBS." Forbes. 10 Dec. 2007. 3 Apr. 2008 < Subprime_mortgage_crisis#Effect_on_financial_institutions>. 4. Schoen, John W. "Just who owns the U.S. national debt?" MSNBC. 4 Mar. 2007. 10 Apr. 2008 <